Party Autonomy and the Choicce of Substantive Law in International Commercial Arbitration

Abstract

A majority of international commercial contracts include an arbitration clause which in the event of a contractual dispute directs the parties to apply arbitral proceeding. One of the central motives for choosing arbitration is the right to choose which law or rules of law shall govern the parties’ contractual relationship. The right to choose substantive law is often referred to as party autonomy.

Most parties entering into arbitration agreements believe that once a choice of law is made, that law exclusively determines the legal framework between the parties. However, this overlooks the fact that circumstances remain in which an arbitrator will be required to apply rules arising from a legal regime other than the one chosen by the parties. There exist in fact numerous of restrictions which in different ways limits the parties´ choice of law. This thesis is an attempt to present a useful and efficient method when identifying which restrictions the parties’ choice of law might be subject to.

Part I points out the basics of international commercial arbitration and presents an overview of the principle of party autonomy in the context of applicable substantive law. Part II shows that party autonomy is a conflict rule which in the event of a conflict between potential applicable laws designates the “correct” applicable law. As party autonomy in itself is a conflict rule, private international law must be applied to determine its scope. Accordingly, private international law and its conflict rules (other than party autonomy) might have to be applied even if the parties have chosen an applicable law. Part III examines current arbitration laws and rules of law in respect to conflict rules. The section shows that modern legislation often grant the arbitral tribunal a far-reaching freedom by letting the arbitrators use the conflict rules it deem appropriate (or even by giving the arbitrators the freedom not to use any conflict rules at all).

Part IV discusses which system of private international law governs party autonomy and determines its scope. It examines the different approaches available for the arbitral tribunal and shows that the most sufficient approach is an application of the so-called closest connection test, i.e. the scope of party autonomy must be determined by the system of private international law which has the closest connection to the subject matter of the dispute.

Part V summarizes the conclusions drawn in the foregoing discussions and reflects upon these. It underlines the fact that private international law still is a national phenomenon -consequently, the scope of party autonomy may vary depending on which system of private international law one applies.